* Euro hurt by smaller-than-forecast crisis loan repayment
* EU Commission forecasts euro zone economy to shrink
* Markets wary ahead of Italian election
By Nia Williams
LONDON, Feb 22 The euro hit a six-week low
versus the dollar on Friday after the European Central Bank said
banks would pay back 61.1 billion euros of the second of two
crisis loans, less than half the amount expected by the market.
The smaller-than-expected repayment signalled some banks
still felt the need to keep hold of the ultra-cheap emergency
loans, and means the ECB's balance sheet will shrink at a slower
A report from the European Commission that forecast the euro
zone economy will contract again in 2013 and caution ahead of an
Italian election this weekend also weighed on the euro.
The euro fell as low as $1.3157, its lowest since
Jan. 10, retreating from a session high of $1.3246 touched after
a better-than-forecast German Ifo survey suggested a brighter
outlook for the euro zone's largest economy.
It was last down 0.1 percent on the day at $1.3170, with
market players reporting supporting bids around $1.3150-60.
"The market was expecting a much bigger drain of liquidity
from the system than was shown, which means people perceive ECB
policy will take much longer than expected to normalise," said
Adam Myers, senior FX strategist at Credit Agricole.
"That undermines the euro, especially given we had a much
more hawkish than expected Federal Reserve minutes."
The euro has come under heavy pressure against the dollar
since minutes on Wednesday fuelled speculation U.S. policymakers
may start to tighten monetary policy earlier than thought.
Some strategists said they expected the euro to grind lower
ahead of the Italian elections, although it should find support
around $1.3040, near the Jan. 10.
Investors were wary about the risk of a fragmented Italian
parliament or resurgence from former prime minister Silvio
Berlusconi, which could hinder the euro zone's third-biggest
economy from fighting its longest recession in 20 years.
"The Italian elections are more difficult to predict, if
Berlusconi and his parties occupy prominent positions then they
really could be a thorn blocking legislation and that is a big
uncertainty and the markets doesn't know how to play that," said
Neil Mellor, currency strategist at Bank of New York Mellon.
The result of the Italian vote is not expected until next
The euro and the dollar rose against the yen, although
strategists said the Japanese currency's three-month decline was
showing signs of losing momentum.
Expectations the new Japanese government will take
aggressive easing steps in an attempt to revive the economy have
helped the yen fall steeply across the board since November.
The dollar rose 0.15 percent on the day to 93.24 yen,
keeping some distance from a 33-month high of 94.47 hit last
week. The euro edged up 0.1 percent to 122.93 yen.
Some market players said the fact U.S. policymakers had not
particularly objected to yen weakness, which makes Japan's
exports more competitive relative to those of other countries,
meant the downtrend could continue.
"We didn't really realise how aggressive the Japanese
officials would get and we also didn't really sense the U.S.
condoning it as much as they did," said John Vail, chief global
strategist at Nikko Asset Management.
"It could be that they (the U.S.) are quite willing to let
the yen get to this level. My sense is that the 95-105 yen level
is the intended range."
Meanwhile, the Australian dollar regained ground
after falling to a four-month low of US$1.0221 against a broadly
stronger U.S. currency on Thursday. The Aussie rose 0.9 percent